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Why Hate the Koch Brothers? (Part 1)

Our latest Freakonomics Radio episode is called “Why Hate the Koch Brothers? (Part 1).” (You can subscribe to the podcast at Apple Podcastsor elsewhere, get the RSS feed, or listen via the media player above.)

Charles Koch, the mega-billionaire CEO of Koch Industries and half of the infamous political machine, sees himself as a classical liberal. So why do most Democrats hate him so much? In a rare series of interviews, he explains his political awakening, his management philosophy and why he supports legislation that goes against his self-interest.

Below is a transcript of the episopde, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.

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If I asked you to name a very famous, generally down-to-earth Midwestern billionaire — that’s easy, right?

Bernie SANDERS in a clip from The Reid Report: They are, the Koch brothers, helping to lead the war against working families in this country.

He must have seen this coming, right?

KOCH: Look, I knew it would be nasty and unpleasant. I didn’t know it would be this dishonest.

Charles Koch isn’t much of a media fixture. But over the course of several weeks, he sat down with Freakonomics Radio for a series of conversations. He discussed what his critics say about him…

KOCH: Most of the facts that I’m familiar with are wrong.

How he first came to see modern politics as corrupt…

KOCH: My first real brush with this was in 1972, when Nixon was campaigning.

And why he’s so worried about America’s future:

KOCH: We’re increasingly headed, under both Republicans and Democrats, toward a system of control, dependency, cronyism, pitting individuals and groups against each other and destroying opportunity and progress.

He talked about the political issues of the day:

KOCH: I would let anybody in who will make the country better, and no one who will make it worse. That would be the same of people who are here illegally… I’m not in favor of people doing drugs. On the other hand, extreme criminalization hasn’t worked .. Obviously, if the temperature continues to go up, at some point it can be harmful or are even very harmful.

We ask the questions we know you’re thinking …

Stephen J. DUBNER: Now the public line on you is that, “Everything that Charles Koch or the Koch Brothers advocate societally or politically is just an effort to protect or extend their business interests.” Make your best case how and why that’s not so.

KOCH: Well, I get to work at 7 or a little before. I meet with customers, with employees. I go over projects, opportunities, and problems. I gather information from all different sources. I’m very strong on driving innovation, creative destruction and making sure we have a learning organization and an innovative one.

Jane MAYER in a clip from Democracy Now!: They’ve gathered around them a group of 400 to 450 other phenomenally rich and influential American conservatives. And it’s given them the equivalent of a private plutocratic political party.

So let’s try to untangle the rhetoric and the reality. And try to figure out if Charles Koch’s views are as doctrinaire as they’re sometimes portrayed or perhaps a bit more nuanced. To understand his views — on politics and society and business — it probably helps to understand where they come from. Starting with … his father. Fred Koch had studied engineering at M.I.T. …

KOCH: And he was tough. He was Dutch and his favorite saying was, “You can tell the Dutch, but you can’t tell him much.”

In the 1920s, Fred Koch had a small oil-refining firm that he was trying to grow into a big one. He aggressively challenged the industry leader — which, in turn, sued Koch for copying its technology. Eventually, he would lose in court. In the meantime, he looked for business overseas — and made his first millions building oil-refining facilities in Stalin’s Soviet Union. Which he hated — the statism and collectivism, the cronyism and corruption. “What I saw in Russia,” Fred Koch later wrote, “convinced me that communism was the most evil force the world has ever seen and I must do everything in my power to fight it.” Back home, he helped start the John Birch Society, which took anti-communism to the point of nativism and racism.

[MUSIC: “Policia At My Front Door”]

Koch also learned that the lawsuit he lost had been rigged: the opponent bought off a judge. From this one pair of events in Fred Koch’s life — getting shut down by a crooked competitor and working under the direction of a communist dictator — you can see the entire blueprint for Charles Koch’s view of the world. The enemies: cronyism, special interests and intrusive government. The solutions?

KOCH: What my vision for a good society is what we call a free and open society. Liberated people can do amazing things. They’re productive, innovative and entrepreneurial. People who are subjugated — intimidated, controlled or dependent — tend not to be.

Charles Koch hadn’t planned on joining his father’s business.

KOCH: He was always tough on me as a kid so I figured I didn’t need to go back through that again.

Like his father, Charles studied engineering at M.I.T.

KOCH: After I finished at M.I.T. I went to work for Arthur D. Little, a consulting firm. After I’d been there for two years or so, my father called me and wanted me to join the firm. I turned him down and so then …

DUBNER: You were not crazy about going back to Wichita at that point, yes?

KOCH: Right. I was learning a lot, having a great time, playing rugby and living in Boston; a lot of great girls’ schools and wonderful girls to date back there. I wasn’t that eager to come back. Then he called me and he said, “Son, my health is poor.” His blood pressure was 230 over 120, if you can imagine. They didn’t have the drugs then, of course, to treat it. He said “I don’t have long to live. Either you come back to run the company or I’m going to sell it.”

Koch agreed to come back to Wichita to take over a small equipment division called Koch Engineering.

KOCH: And so that worked great. Then, he turned over the other areas to me. But he lived longer than he thought he’d live, six years, and I got to work with him for six years.

After his father died, Koch planned the firm’s future.

KOCH: I wanted to build the businesses we had. My view, as it still is, is that the way to succeed is to understand what capabilities you have to create superior value, find the best opportunities for them and then constantly improve those capabilities; add new ones, which will open new opportunities for you. That’s been our vision and our approach ever since. We’ve just kept building capabilities, adding new ones, finding new opportunities which gave us additional capabilities and so on.

DUBNER: When I look at Koch Industries’ employee satisfaction ratings, which you can look up these days, the firm does quite well. But in terms of the CEO ratings — that’s you, you do really well. You’ve got a 92 percent approval rating. Now, I have no idea who is writing these. Maybe this is and your wife writing all the reviews.

KOCH: No I haven’t. The first I’ve heard of it. Well, good. I wouldn’t rate myself quite so high, but somebody has that belief.

DUBNER: If someone in business, starting out, asks you for some structural basic advice of running a firm — managing people, juggling it all — what would you tell them?

KOCH: The first thing is to understand what your innate abilities are, what you have a passion for and you’re really willing to work hard at. Then, think through how that translates into how you create value for others, because that’s going to determine how successful you are, what life you have [and] how fulfilled you are. In an organization, you need to create value, first of all, for your customers. Then you need to create value for your employees and partners. Then you need to create value for society at large.

KOCH: Well, I love it. What I love is innovation, finding new ways to create value. Improving. I believe everything we’re doing can be done much better and will be over time. That’s what keeps me turned on. Plus: helping our people transform themselves, become lifelong learners and constantly learning how to create more value.

If you’ve been listening to Freakonomics Radio for a while, Koch’s management philosophy may sound familiar. It’s built on a lifetime of reading economics and other social sciences.

KOCH: Starting at MIT, I became fascinated with scientific progress, the philosophy of science, the scientific method. Then I became fascinated with social progress, as well as scientific. I started studying economics, psychology, sociology and general philosophy. And then, applying the principles I learned in the business. That’s what ultimately led to our management philosophy, which is what we call market-based management.

DUBNER: For someone who’s never heard of it, let’s just start with your brief description of market-based management.

KOCH: Okay. Market-based management has five dimensions: vision, virtue and talents, knowledge processes, decision rights and incentives. When you put that together in an integrated package, it gives leaders and everybody in the company a toolkit to solve problems and capture opportunities. A critical part of our management philosophy is building what we call a ‘challenge culture.’ We find that’s one of the biggest problems in acquisitions we make. In many of them, if you challenge your boss, it really hurts your career. Here, if you don’t challenge your boss — not to show how smart you are or be clever, but because you see a problem in what’s being done or you have a better idea — if you don’t challenge, you’re not really doing your job.

If you’re here as a leader at any level and your people aren’t challenging you, you’re obviously not a good leader because they’re intimidated, you haven’t encouraged them, you haven’t rewarded them, they’re afraid they’ll be put down or look stupid.

DUBNER: Do you ever worry that strong decision rights will tip into, not quite anarchy, but a too-decentralized management mechanism where individual managers may have such autonomy or such strong decision rights that they will turn into mini dictators?

KOCH: Right. That is absolutely a danger. Many companies, they’ll get centralized and they’ll find that’s not working, so they get decentralized. The way we look at it is that certain things need to be centralized. That is, the people at the center have better knowledge of the effect of something on the other businesses, how that fits the overall strategy or our market trends than the people at the plant. But there are other things that the people at the plant have better knowledge. It’s the division of labor by comparative advantage. We are very centralized on some things and very decentralized on others. Is it perfect and does it always work great? No. But it’s a constant balance, reworking and trial and error.

DUBNER: I’d like to talk about incentives for a little bit, because as you and I know that’s the cornerstone of economic thinking. Because of the way that incentives work at your firm, a given employee can start making more money than his or her manager. I’m curious how people respond to that. Does that create turmoil?

KOCH: Well, I’m not into their psyche. But let me just say it works great. It does. Look at basketball: does the coach quit because LeBron James makes more? He says, “LeBron, go for it because you’re making me look good. Keep it up and I hope you make five times what I do.” That’s the culture we try to build here.

DUBNER: From what you’re telling me now and from what I’ve read, it sounds as if market-based management — the operating system of your business — is pretty similar to what you, Charles Koch, would like to be the operating system for society at large: a structured, principled environment that encourages self-determination and so on. But surely it’s a lot harder to create or impose this framework on society than on a private firm, yes?

KOCH: I know what you’re driving at. The answer is yes, but not structured. I want a system of spontaneous … What I want, my ideal — if the world were ready for it — is to truly have a society that represented the principles in the Declaration of Independence. That is: everyone is created equal with certain inalienable rights and governments are instituted to secure those rights. Then I look at the four core institutions in society — education, communities, business and government — and determine, “What is the ideal for each of these types of institutions that will help move us in that direction?”

DUBNER: Back in the 1960s, long before you were involved politically as you are now, you argued that the role of government in the capitalist system at least should be, “only to keep a check on those who might attempt to interfere with the laws of supply and demand.” I’m curious to hear how deeply you truly believed that then — that the role should be limited — and how you feel about it now.

KOCH: Right. Well, I’ve matured a little bit, being 81. You would hope, finally. I look at government. What is government? I like Max Weber’s definition of government the best. It’s most helpful to me. That is: government is the social institution with a legal monopoly on force in a given geographic area. The nature of government is force. I believe that government should act when force works better than voluntary cooperation and competition. The starting point on things it does is use force when force is inherent in it, like to protect the country from foreign invasion. Police try to protect people from being robbed and killed. But there needs to be a social safety net. Then the question is, “What is the optimum social safety net and how would that work?

DUBNER: I have to say — and I say this with the utmost respect — you’re a total nerd, aren’t you?

KOCH: No! What? I’m a fun-loving guy. Hey, I was a rugby player. You kidding me? But yeah, I’m a nerd.

DUBNER: Now, for many years you avoided politics and then you stopped avoiding it. Why? What changed?

KOCH: Well, it was during the Bush administration. I started in giving kids scholarship who were interested in self-transformation and self-development — along the lines we’ve been talking — and then supporting professors as they heard about what I was interested in and so on. Then, [I] got into, “We need to flesh out the policy implications of these ideas.” And then get into, “Now we have a lot of people who are interested in them. We need to help them mobilize to get this stuff done.” Then George Bush, 43, was elected. It looked like he was going to advance some of these ideas. Then he went the other way. Under him, the federal government grew 50 percent more than it did under Clinton and roughly three times the number of restrictive regulations were passed under him. We got in disastrous wars and just one thing after the other.

So I said, “We’ve got to have people who don’t just campaign on these ideas but who really believe them. We’ll support those who advance these ideas.” That’s how it got started.

Coming up on Freakonomics Radio: once he got started, the reach got broader and broader.

KOCH: We’ve had a number of successes and lot of failures with the Obama administration.

That’s coming up, right after this break.

* * *

DUBNER: Good morning, it’s Stephen Dubner. Charles, how are you?

KOCH: Hey, great. How are you doing, Stephen?

We’ve been speaking with Charles Koch, CEO of Koch Industries but, much more famously, one of the men behind a massive funding operation designed to blow up what Koch sees as the political status quo.

DUBNER: Let me ask you this — and I don’t mean to sound skeptical or snarky — but why do you care personally so much about shaping society at large? Most people — I’m guessing 99 and a half percent of the people listening to us talk — don’t know anyone that’s anywhere near as wealthy, as accomplished and powerful as you. A natural inclination is to say, “That person just wants to exert the power for ego gratification, for further enjoyment or maybe for further magnifying his own wealth and power. Persuade me that those are not the motivations and that your desired social engineering is for the greater good.

KOCH: We fought a revolution to get rid of royalty and we don’t need royalty here. It’s seeping back in in different forms. But basically I was blessed starting at an early age to have learned certain principles, concepts and values that transformed my life and enabled me to accomplish more than I ever dreamed possible. Since that time I wanted to give as many people the opportunity to do the same. That is: to develop their full potential and become lifelong learners and lead successful fulfilling lives. Now, when somebody gets that thought in their mind and that’s what they’re thinking about every day, that affects their whole approach to life. They think, “I want to do that in my family. I want to do that in my communities.”

It changes their mental models. It changes the way their brain is hard-wired. That’s what we find in all our work in education and everything. I have seen these ideas transform thousands of people. So they lead better lives, as Frederick Douglass did once he got these ideas. He didn’t just fight to free other slaves. He fought for women’s rights, for immigrants’ rights, for persecuted religious minorities’ rights. That’s what we see. That’s what I want. I want the people to be liberated. I don’t want to control them.

DUBNER: But why do you care so much?

KOCH: Because it transformed my life. I [would] love to see it transform other people’s lives. Because if you have a success and you feel good about it, then you want more of that. That’s what I get. You could say it’s like a drug. But I hope it’s a drug that makes me work for good, not for ill.

KOCH: Like everything else, we need a legal system that is just, where the punishment fits the crime. We also need a system that, if people make a mistake, [they] learn from their mistake. They need to have a second chance rather than ruin their lives. Now it is a tough sell because people believe, “God, you’re going to let all the criminals out. We’re going to be less safe.” No, the idea is to make people more safe. When you have draconian penalties, penalties that don’t fit the crime, then the police are about to arrest somebody, for, let’s say, selling marijuana. You may have a gun in your car because you’re afraid of being attacked. What is somebody going to do when they’re going to be arrested? They don’t have the attitude that, “Gosh, I’m going to get a penalty but I’ll be all right.”

It’s going to ruin their lives. What did they do? They fight back or run and then they get shot. The whole thing escalates.

This project aligned Koch with the Obama White House — a fact President Obama noted when he spoke to the N.A.A.C.P. in 2015 about sentencing reform:

President OBAMA in a clip from the White House: This is a cause that’s bringing people in both houses of Congress together. It’s created some unlikely bedfellows. You’ve got Van Jones and Newt Gingrich. You’ve got Americans for Tax Reform and the A.C.L.U. You’ve got the N.A.A.C.P. and the Koch brothers. No, you’ve got to give them credit. You’ve got to call it like you see it.

So how, and why, did Charles Koch come to be such a huge political player? As he tells it, the genesis goes back decades, and is firmly rooted in ideological principles.

KOCH: I tried to read and meet people who would give me ideas, expose me to principles that I could apply in all aspects of my life: business, social community and in the societal realm. As I did this, it became clear to me that virtually every human being has the ability to learn, develop, contribute and succeed if they are given the freedom and opportunity to do so. Then I learned that when ideas of individual rights and equal rights started to come into being — in Holland first, spread to England, in the United States, even France and other countries, particularly in Europe — that it liberated the average person. And as they were liberated, then they started working to develop themselves, to better themselves. In the process they made themselves rich, relatively, and then made everybody else rich.

The first steps were giving out scholarships, setting up think tanks, and funding like-minded academics. But that wasn’t fully satisfying.

KOCH: It became obvious that we had a society and a political system largely governed to satisfy special interests and parties had formed around those special interests, which George Washington worried about. As you know, he warned us that if the politics become an extension of parties that we will lose a lot of the promise and hope for the country because parties become an end in themselves, in advancing them and their supporters and special interests. My first real brush with this was, I think, in 1972 when Nixon was campaigning. And he had a committee to re-elect the president and he sent them around to companies to strong-arm them for a million dollars or so, which was illegal, to support his campaign. And so they approached me and I wouldn’t have any part of it.

And then, my next politically-related involvement happened in the late ‘70s as I saw this cronyism, this corporate welfare, really getting more and more entrenched and leading more and more to a two-tiered society.

By “two-tiered society,” Koch means the political and other elites who try to shape society and everyone else. Koch knows he’s firmly in the top tier. But he still dislikes that blatant division. And so…

KOCH: I formed something called the Council for a Competitive Economy and the idea was to build an organization of business leaders who would oppose all forms of subsidy and corporate welfare, even and especially when they benefited that company. I have Milton Friedman to be chairman of my board of advisors. I sent a letter to hundreds of business people with his name. I got a lot of answers back, but they were typically along the same theme: they agreed in principle that we need to get rid of all the special dealing and rigging the system and everybody will be better off. But it doesn’t work for their industry. They need to be protected or they’ll go out of business and that will hurt the country. And over and over again. We said, “My God.”

I approached Rich Fink, who was a professor at George Mason, to come and run this. Maybe he could make it successful. “No,” he said. “You can’t depend on business people. They’re too short-term-oriented, particularly public companies. They’re going for the quick buck rather than what’s good for themselves and the country long-term. We’ve got to go to the citizens who are suffering from this.” So he joined me and we set up something called Citizens for a Sound Economy. And our first real success in that was in the Clinton years, we stopped — not by ourselves, but with others — the B.T.U. tax and Hillarycare.

The B.T.U. tax sought to curb pollution from carbon-based fuels and other energy sources; Hillarycare was a proposal for universal health care promoted by then-first lady Hillary Clinton— a precursor to ObamaCare, which Koch would also oppose. In any case — as Koch noted, he was among those who pushed to defeat the so-called Hillarycare and the B.T.U. tax.

KOCH: And that changed the direction of the Clinton administration. You remember, [President Clinton] said, “The era of big government was over.” And when Bush 43 won, we thought, “Oh my. There might be some hope in having a principled administration, one who would take it in the direction we were urging. And boy, was that an eye-opener because, in fact — although he meant well — President Bush did the opposite. They increased the size of government 50 percent more than Clinton passed, almost three times the number of restrictive regulations including things like McCain-Feingold, Sarbanes-Oxley, then drug subsidies, No Child Left Behind — which, in our view, took education in the wrong direction — increase in steel tariffs, getting involved in counterproductive wars for the wrong reasons.

KOCH: Then we got set up to become more effective, to elect better people, to hold them accountable for what they ran on and to constantly encourage them to move us toward a system of mutual benefit rather than increasingly toward a two-tiered society. We had a number of successes and lot of failures with the Obama administration. But where we had the best successes were at the state level.

DUBNER: Now, your description of that involvement sounds, to my ear at least, as sincere, considered and informed. And yet, obviously, you’re a smart enough guy to know and you don’t even have to be that smart to know that your name alone, along with your brother David, as the Koch brothers, is — and I don’t think I’m exaggerating here — essentially a curse word in many precincts. A couple easy examples: Jane Mayer —the journalist, one of the leaders of the anti-Koch movement — in her book, Dark Money, blames you for fueling, “The rise of the radical right.” Harry Reid, former Senate Majority Leader, said you were trying to buy America. There’s the UnKoch My Campus movement to get rid of Koch money that goes to fund academic researchers.

How do you feel about having earned that reputation? You plainly didn’t get involved in this stuff in order to become public enemy number one.

KOCH: No, but look: we’re trying to go back to the principles on which this country was founded. That is, everyone is created equal with certain inalienable rights and governments are instituted to secure those rights and to liberate the people so we can have human flourishing in this country. The only way we’re going to do that is to take away the power from those who are rigging the system for special interests. Now, when you threaten special interests, you are public enemy number one. It’s been nasty and unpleasant. As a matter of fact it’s more … Look, I knew it would be nasty and unpleasant. I didn’t know it would be this dishonest, although from all my study of history and so on, I should have known. But this is threatening stuff. I haven’t read Jane Mayer’s book, but people have asked me about various pieces and there are some facts right.

Most of the facts that I’m familiar with are wrong. This is why you prefer to stay away from politics. It’s such a nasty game.

DUBNER: In retrospect, Charles, do you regret getting involved with the political stuff?

KOCH: I was a little like Martin Luther on trial where he said, “Here I stand. I can do no other.” DUBNER: I’m curious: do you vote regularly?

KOCH: Yes. Back in the day, I didn’t. I was too disgusted with it. But if I’m going to invest all this time and money in this area, I at least have to vote.

DUBNER: When’s the last time you voted for a Democrat?

KOCH: Probably 10 years, I guess.

DUBNER: Do you remember who it was?

KOCH: No. No I don’t. We’ve supported a number in the past. I would support a Democrat just as soon as a Republican. I’m interested in the principles and the policies. I don’t care what the label is, I care what the policies are. Are they going to help people improve their lives or make their lives worse?

But the fact is that the vast majority of candidates he’s supported have been Republicans — many of whom have campaigned and governed on platforms that contradict Koch’s more liberal-leaning initiatives. So you can see why critics are skeptical that his intentions are as pro-social as he might communicate. You can also see that Charles Koch has a lot to say, and he’s not afraid to say it. In fact he had far too much to say for one episode — so we’ll put out the rest in a special bonus episode. You won’t have to wait a full week for it — just 24 hours. You’ll hear Koch argue that a lot of the legislation he’s pushing for goes against his company’s self-interest:

KOCH: There are roughly a trillion and a half special exemptions in the tax code we benefit tremendously from. We’d get rid of all of them.